Life cycle cost in the Belgian Defense: a new topic or a well known - - PDF document

Life cycle cost in the Belgian Defense: a new topic or a well known business Ladies and gentlemen, it is an honor for me to act as key note speaker on this

• colloquium. I must admit, it has been a while since so many distinguished people were

gathered in front of me to listen to what I have to say. I suppose you’re not only here due to my appearance or my presentation, but probably you are interested in the topic

• f today’s briefings, notably Life Cycle Costing or Life Cycle Cost.

I will try to develop my thoughts on the hand of some questions that came up in my head when I first heard of this colloquium. And of course, I will try to give you some elements for answering these questions, be it the elements will be generated in my own head and are not always (perhaps even not often) supported by any academic or practical research. So I think it’s good to present up front my apologies to whomever I might shock or confuse with what I’m going to say. The first question I want to answer is a very easy one: why me as key note speaker? As in early 2011 the Colonel Faut, Director-general of the Royal Higher Institute for Defense, launched the idea for this colloquium, it seemed logic that she choose to coordinate with the different divisions and the chief of the Directorate General Material

• Resources. After a big period of thinking and brainstorming, the form and content of the

colloquium got into its final shape and the question popped up if some-one (preferably a “general”) could address the key note speech. Obviously, the answer to this question stands in front of you. I can think of several reasons for this, like “I’m the youngest general officer in the directorate general material resources, so …”, or “Because somebody has to do it and because this is the easy part”. I hope these are not the reasons. I accepted this challenge because in my previous life, as officer “born and raised in logistics”, I have had some experience in several areas related to logistics and the different elements of the life cycle of materiel and equipment, so the different sub domains of life cycle cost are one of my drivers, even today. Second reason is that, as being a major, at the end of my Higher Staff Course in June 1999, I handed in a thesis where the use of LCC as an evaluation criterion for granting contracts was one of the points of discussion. I will come back to this later in my briefing. And last but not least, as head of the Belgian Defense Procurement Division, I am confronted with European ideas, that already are or in the future will be translated in European Law, where life cycle cost plays a major role. So, the different presentations of this afternoon will hopefully give you and me some good ideas or “heads on” on this topic. So far for the first and most easy question. The second question is already less basic and thus more difficult to answer, and goes like: Why do we want to use or elaborate the principle of life cycle cost? Examining the organization I’m working in, the directorate general material resources,

• ne realizes our daily work and responsibilities are build around and based upon a

model of life cycle management and this for our entire infrastructure and for all our equipment (be it major or minor). When looking at what we use to call the “wheel for integrated material management”, you’ll see that every different phase of the life cycle for material, equipment and infrastructure has its place. It starts with an idea of what we

need – we call it the “technical definition of objectives” – it passes through the acquisition phase and the life support activity and it ends with the disposal of this object. All the different aspects and areas of influence on these life cycle phases find their place in our organization, be it with the budgetary responsible, the material manager or the acquisition officer. Or in other words, what do we have now: we have acquisition, life support cost, disposal revenues or cost, all managed in one directorate general. All data that are linked with an action in one of these aspects, areas or phases are gathered in the database of a single and unique logistics information system, called ILIAS. So, in theory, we are able of calculating what I would call the “pure life cycle cost” for all equipment and material that is managed with ILIAS, be it with a major remark: for older equipment, probably the starting data are not available, and for newer equipment, the revenues or costs for disposal are still missing as they still are in use. Why do I use the expression “pure life cycle cost”: because the secondary data, related to manpower and man hours performed on this equipment, training and education costs, transportation costs, etcetera are missing or incomplete. Never the less, all these data already give us a good basis on what a system, infrastructure or equipment costs. And the experience shows that acquisition of the major equipment is budget heavy, maintaining and using it is sometimes even more constraining. Coming back to my question, “Why do we need life cycle cost”, and taking into account what I developed some moments ago, I am convinced that thorough life cycle cost simulations can help us in several situations. The first situation I’m thinking off is when we need to convince people when starting an acquisition program or even when launching the idea for buying new equipment. I’m thinking of persons like politicians, budgetary responsibles, the Inspector of Finance, …. Very often, and our budgetary situation is a driver in most of these discussions, the question that pops up is what will it really cost to use this equipment, with details for acquisition, support, sustainment and sometimes even disposal (will it cost to get rid of it, or will it bring in some money)? Another moment where it might be useful is the opposite situation at the other side of the spectrum: as material manager, one is confronted with a user that declares “I need new equipment, the actual equipment is end of life.” The questions to be put here are clear: Is this really so, do we need to dispose of it and buy new or does this equipment still has a future? Life cycle cost and or life cycle cost simulation can present a solid and unbeatable base for decision, or can prove our costumer is right !!! So far some thoughts why we could or would need life cycle cost calculations or

• simulations. Let’s tackle a new question, and now a personal question of Rudy

DEBAENE: What is my dream, off course in the area of life cycle cost and not in the area of cars (like most of you I want a Ferrari or a Porsche but can not afford it)? As head of the Belgian Defense procurement Division, one of my areas of responsibility is the follow up of the contractual phase of our big investment programs. In these programs, life cycle of the material and equipment plays a major role in the evaluation of the bids and in the final attribution decision. We do this through the logistic annex of our request for tenders, where all aspects of life support for the considered major equipment are taken into account. So, in a certain sense, we use a kind of life cycle cost simulation

in the acquisition process. The origin of this is to be found in the way we manage our equipment (I already mentioned our “management wheel” before), but also in the directives imposed by the federal government. For every big investment program, the Federal Government imposes through the intervention of the Inspector of Finance the request for prove that the program has a complete budgetary coverage. This is not only requested for the acquisition phase, but also checked in the area of maintaining and

• supporting. In most cases, our logistic annex focuses on the whole spectrum of logistic

support: from in house support with acquisition of spares, training, technical documentation, etc, to the complete outsourcing of the support and sustainment by means of an “omnium maintenance contract” where the purpose is to pay by the kilometer or by the hour. As you can see that “life support costs” are key, the only thing that is not really treated in the acquisition phase is the “end of life” aspect of the equipment. As life cycle cost plays a major role, we decided in the 2004 – 2006 timeframe to try out the use of a “life cycle cost simulation” in the attribution phase for the acquisition of our “multi purpose protected vehicle (MPPV)” and “armored infantry vehicle (AIV)”. In the request for tender, the starting point was to go to an “off the shelf” solution, where the major weapon systems and the carrying vehicle needed to exist. We asked, as Nato Stanags prescribe, a system readiness level or SRL of at least 7, what means the system has past the phase of research and development, and is “production ready”, with already some orders in for the same system. In this way, Belgian Defense wanted to eliminate maximally the risk for buying a product that was not mature, and wanted to be able to predict and thus manage the future costs for normal use. The prime contractors to be were asked to deliver a whole set of data concerning the life support of the system, the predicted maintenance sequences, their industrial support organization, their entry point on the Belgian territory … Purpose was to put these data through a life cycle cost simulation tool (OPUS for MPPV, SPAR for AIV) and use this result in the evaluation phase of the programs, or if this would not be possible due to time constraints, it would be used to work out the best logistic support suite for these equipments. And now the question that I see in everybody’s eyes: Was it successful? Unfortunately, I have to tell that the answer is no. Due to time constraints put upon us during the acquisition phase, we were not able of performing a thorough simulation. The reason why it failed in this phase is that our specialists would have needed several months (4 to 6 months) to do a deep-going and thorough study and simulation. In the decisional timeframe, where the team disposed of not more than 3 months between the hand in of the offers and the final approval of the contract by the Council of Ministers at their last meeting of the year (somewhere around 23 or 24 December), there was no room for putting up a complete simulation. Then, finally, we decided to run the simulations after contract awarding in order to get a more accurate “theoretical” view on the sustainment phase of these major equipments. But again it failed: due to a lack of adequate information from the industrial partners we were not able of getting the simulation running and only were able to end up with partial

• conclusions. So you see where my dream comes from: I’m convinced of the use of

these kinds of simulations in the context of the decision taking process, but to realize

my dream I’m afraid there is still some work to do at the military, and even more at the industrial side of the house. When you can’t reach a dream, you have to come back to reality for performing a “touch base” or you can head for a new dream. What I did was looking for an answer on my fourth question: is there an area where it works, do I see an evolution in a certain way? I’m still looking, personally, for the answer on the first part of the question, but I can certainly see an evolution. My actual function has given me the opportunity as Army Officer of getting involved in major programs for the other Forces. In this way, I’m head

• f the Belgian delegation in the steering committees for programs like A400M and
• NH90. In these programs, and more specifically in the program division of the

contracting agencies that are responsible for these acquisition programs (OCCAR and NAHEMA), one can find specific personnel for the domain life cycle cost. Both programs have, next to the fact that the domain is the acquisition of an aircraft, one major characteristic: it’s a long lasting development program (in terms of 10 years or more to come from the startup to the first delivery of a major weapon system). When I discussed the matter of life cycle cost with these specialists, I got, both times, the same remarks: we have adequate tools to do the simulation, but when we want to get the proper data to do the simulation, it’s very hard to get the right answers… Apparently, even in a domain where, in my personnel mindset, life cycle cost is more common, it’s not easy to perform an adequate simulation. The only reason I can think of is that this stagnation is due to fact that we are facing “development programs” where statistic data are not known (A400M) or not to the point and representative enough for the later part of the production (NH90, meanwhile more than 75 helicopters are in use since several years). Some people with a negative mindset even made the remark that the basis for this lack

• n information is unwillingness of the industrial partner, but I find it very hard to accept.

What stands is the fact that both organizations keep the LCC people in there teams and are pushing the industrial partner as far as possible. So in response to this question, do I see an evolution, my answer is positive, be it with a certain nuance: performing adequate life cycle cost simulations need good communication between “buyer” and “seller” and the use of these tools and data need to be defined early on in the project or in the program. My experience, based on the presentation of several investment programs to the Inspector of Finance and to the Belgian political world, learns that defending a new investment program in an adequate way doesn’t stop with defending the acquisition budget, but goes up to the borders of its life time usage and sustainment. I guess this is also the experience at OCCAR and one of the reasons why at OCCAR the “though life management initiative” is born: getting a complete view on the life cycle of the equipment and imposing this view from the start in new acquisition programs is and will be key for the future. Other indications that life cycle cost will be playing a more important role can be found at NATO and European level. At NATO, the ALCCP-1 (Allied life cycle cost publication) exists since mid 2008 and gives guidance on the use of life cycle cost. Although this publication doesn’t impose anything, it forms a good basis for discussion and future “good practice”. At the European level, some people think of adapting the European legislation by imposing life cycle cost in large acquisition programs and some minds

even play with the idea of imposing simulation models in this area. In my mindset, this might be the end state in some years, but these ideas surely need more development and practical thinking. To complete the search for answers to this fourth question, I personally think other domains also can find adequate help in the ideas of a life cycle cost simulation. It’s perhaps a little bit over the edge – as we are in an academic environment I use the academic freedom to think a little bit out of the box and throw these elements in the public – but the ideas we use in the material management world, might be useful in

• ther areas, where we work from “cradle to grave” (not to be taken literally in the

following examples): human resources management (when we create a new function, what does it cost versus outsourcing) or operational management: do we want to get new capabilities? If so, what is the overall cost for bringing it in, not only on the equipment side of the house, but also on personnel, deployment and redeployment costs, training, side effects. I leave it up to the specialist to decide if these ideas are acceptable and perhaps we might even get some answers in the presentations scheduled later this afternoon. To end this part of the seminar, I would like to come back to the title I used: is Life Cycle Cost a new topic or is it well known business. As I see it now, life cycle cost is nor new, neither well known in the Belgian Defense. In the Directorate General Material Resources we use all of the elements in our daily business, but the life cycle cost simulation part sometimes is missing due to a lack of experience or a lack of

• information. This brings me to the conclusions of my presentation:

As material managers, we need to explore the world and the limits of the life cycle costs and adequate simulations linked to it. We can’t do it all by ourselves: we need the exchange of valid information amongst defenses, with industry, with users. Life cycle cost and its simulation have to be integrated in the early phase of the acquisition process so it can be used as a major element in the final decision taking

• phase. If complex tools and calculations can not be integrated due to time constraints,

alternative life cycle cost elements and practices have to be used. I thank you for your attention and now I’m looking forward to the other presentations this

• afternoon. It’s my hope to identify for myself and for our organization where we stand in

the area of life cycle cost and where we can improve the way we do our business.